Usually financial writers and commentators write about stocks you should have in your portfolio in order to make money. However, not owning dogs that will not make you money is sometimes just as important.
Intel is a stock that has not done much over the years, primarily because it was a bubble stock years ago. As a result, it took over a decade for the fundamentals to catch up to its stock price. Today however Intel is a reasonably priced stock, but the question is, will it make you any money?
One problem with the company is that it has been spending a lot of money on R&D without getting much in return.
Sure EPS has been going up as a result of share repurchases, however, absolute profits for the company as a whole have not. Not that Intel is experiencing any cash flow issues, but one has to ask if the stock repurchase program might be in any danger as a result of the very big R&D expenditures.
If Intel has to keep increasing the money it spends on R&D just to stay competitive, then the company's profit picture might deteriorate, both on a company and EPS basis.
The average 12 month forward target price for Intel by the analyst community currently stands at $24.45. So unless you like the dividend a lot, buying or holding onto Intel will probably not make you any capital gains.
Twitter is one of those stocks that for some reason is valued much more than it should be by the market for no apparent reason that I can comprehend. It's not the only stock that is valued beyond my understanding, there many more like it.
The main reason why you should not consider having Twitter in your portfolio as a pick for 2014 is because of its valuation. Contrary to Intel, that has very little risk attached to it (my beef is that it will not make you money, not that you will lose money), Twitter has a lot of risk attached to it because of its valuation and you could end up losing quite a bit.
Currently Twitter trades at a P/B ratio of about 50, a Price/Sales ratio of about 75 (that was not a typo), has no profits and will not have next year either. Why would anyone want to own this stock is beyond my comprehension of the rules of investing, as I am aware of them.
On Friday the stock was down about 13% for no apparent reason. But with these valuations, it really does not need any reason to fall. Because the question is not why it was down by 13% last Friday (and another 5% today), but why it reached its current high of $71 to begin with.
Last but not least, if analysts have it right, the average twelve month price target for the stock is about $43. While analysts don't always get it right, they usually do and in any case they are a good guide. And if you ask me, $43 a share is still very generous.
Tesla is another stock you should avoid getting involved with in 2014 based on valuation concerns. Like Twitter, this stock is priced to perfection and then some, and the risk of losing a significant portion of your initial investment is very high, due to its bubblish valuation.
Tesla is a great company, but buying a great company does not mean you will always make money. You have to buy the "great company" at a price that makes sense to be able to profit. Because it's one thing paying a premium and it's another to pay through the nose.
As a reminder, many other great companies were bought by the market with a vengeance only to reward investors with losses over the past decade. Some of those great companies include, Microsoft (MSFT), Intel and even Cisco (CSCO).
What Tesla has in common with all these companies is the fact that the price of Tesla's stock is very far ahead of the fundamentals. You can not buy any company with a Price/Sales ratio of 11 and a P/B ratio of 33 (like Tesla has) and expect to make capital gains in the long term.
Besides the valuation that makes no sense, more and more companies will be introducing electric powered vehicles in the years ahead and Tesla will eventually have a lot more competition. When that happens and when the concept becomes mainstream, expect the price of the stock to fall, for the fundamentals do not have time to reach the price of the stock.
You are probably surprised by this pick, but I think IBM is also exhibiting signs of a non performing stock lately. IBM is not an expensive stock (far from it), but it will probably not make you much if you own it either.
If one picture is worth a thousand words, I think the chart below says what is wrong with the stock and why the market is discounting IBM compared to its peers:
One issue I see with IBM is that its EPS growth on a y-o-y basis fell to negative territory recently. One quarter might not be a big deal, but to me it says it might be the start of a lower EPS count for IBM looking forward. In addition, revenue grow has stalled for several hears now and it might be very difficult to get it back with IBM missing out on the cloud front.
Right now the best thing the stock has going for it is the stock repurchase program. Granted that this might be a catalyst for higher prices, but not by much. The company needs new revenue catalysts to see much higher prices, and at the moment this is nowhere in sight.
Since this might be my last article for the year, I want to wish everyone here at S.A. a happy new year and a festive holiday season.